Putin Buddy Gets $7 Billion of Deals for Sochi Olympics

The Bolshoi Ice Palace and Olympic village construction sites are seen at the Olympic Park in Sochi. Photographer: Mikhail Mordasov/AFP/Getty Images

March 19 (Bloomberg) -- Arkady Rotenberg, the boyhood
friend and former judo partner of black-belt President Vladimir
Putin, already is collecting his winnings from what promises to
be the most expensive Winter Olympics ever next year.

Rotenberg’s companies have been awarded at least 227
billion rubles ($7.4 billion) of contracts for the 2014 Sochi
Games, according to figures compiled from corporate and
government filings. That’s more than the entire budget for the
2010 Vancouver Olympics, though it represents just 15 percent of
Russia’s latest estimate for the Sochi event.

Those contracts, which number at least 21, include a share
of an $8.3 billion transport link between Sochi and ski resorts
in the neighboring Caucasus Mountains, a $2.1 billion highway
along Sochi’s Black Sea coast, a $387 million media center, and
a $133 million stretch of venue-linking tarmac that will double
as Russia’s first Formula One track.

“This is a monumental waste of public money,” Stefan
Szymanski, a sports economist at the University of Michigan who
tracks Olympic spending, said by phone from Ann Arbor. “A small
number of people at the top have control of resources and there
is no accountability.”

$50 Billion

Rotenberg, 61, is among a handful of men Putin has known
since childhood or from his days in the KGB or St. Petersburg
government who’ve amassed riches and power during his 13-year
rule. Their fortunes have come at times at the expense of men
who flourished under his predecessor, Boris Yeltsin, and the
consequences of the differing wealth pedigrees are on display in
Putin’s $50 billion push to prepare Russia for its first Winter
Games. The country is considered the most corrupt of the Group
of 20 economies by Berlin-based Transparency International.

Potanin and Deripaska, the CEOs and largest owners of OAO
GMK Norilsk Nickel and United Co. Rusal, respectively the
world’s largest producers of nickel and aluminum, have been
handed projects that may not turn a profit for years, if ever.
Potanin is spending $2.2 billion on the resort where most of the
skiing events will take place, while Deripaska is putting $1.5
billion into revamping the local airport and constructing a port
and one of two Olympic Villages to house athletes and officials.

‘Commercially Useless’

Rosa Khutor, Potanin’s facility, has missed 14 billion
rubles of interest payments on loans from state development bank
VEB because it’s been closed to tourists for parts of three peak
seasons for test competitions, Sergei Bachin, the head of the
project, said in an interview in Moscow on March 12.

The resort, serviced by state-of-the-art ski lifts from
Doppelmayr of Austria, was all but deserted on a sunny March 7
because the slopes were cleared for a para-alpine World Cup
championship. Rosa Khutor will need to spend another $130
million after the Olympics to convert the facility into a fully
commercial operation, Bachin said.

“A lot has been built for the Olympics that is
commercially useless before the games and after,” Potanin said
last month during a tour of his project with Putin and Jacques
Rogge, president of the International Olympic Committee. “The
money has been spent and interest is accumulating.”

Basic Element

The $200 million port Deripaska’s Basic Element constructed
to dispatch Olympic building materials is handling as little as
one-fifth of the planned volumes because freight traffic has
been redirected to railways and roads, making the venture
unprofitable, according to the company.

“If investors don’t get any return or government support
and in effect lose a large part of the funds they’ve invested in
the Olympics, it won’t have a positive impact on our investment
climate,” Basic Element Deputy General Director Andrey Elinson
said during a March 12 interview in Moscow.

Olympstroy, the state company overseeing Sochi’s
transformation, declined to detail the costs of its individual
projects. Olympstroy has had four general directors in six
years.

The bulk of Rotenberg’s Olympic contracts are held by OAO
Mostotrest, a Moscow-based company set up under Josef Stalin in
1930 to build bridges across the Soviet Union, according to its
website. Rotenberg and partners, including his son Igor, gained
control of Mostotrest in 2010, just before the company raised
$388 million in an initial public offering.

Putin Link

Rotenberg’s aide said he was unable to comment on his work
on the Olympics. Officials at Mostotrest didn’t respond to
requests for comment by e-mail and phone, nor did
Stroygazmontazh, another Rotenberg company with state contracts.

Rotenberg told the Financial Times in an interview
published in November that while he values Putin’s friendship,
he’d never abuse it for personal gain.

“I have great respect for this person and I consider that
this is a person sent to our country from God,” the newspaper
cited Rotenberg as saying about Putin.

Dmitry Peskov, Putin’s spokesman, said Rotenberg’s success
is unrelated to his ties with Putin.

“No friendship can grant you access to Olympics projects,
which are very difficult to get because they’re hard to
implement and aren’t as profitable as many other construction
contracts,” Peskov said by phone on March 15.

Gazprom Pipelines

Rotenberg gained his fortune by selling pipes and building
pipelines for state-run OAO Gazprom, the world’s largest gas
producer. Stroygazmontazh, which Rotenberg owns with his brother
Boris, built a gas link to boost supplies to Sochi for 32.6
billion rubles, five times more than first budgeted, according
to Olympstroy and government data.

The Rotenberg brothers are now worth $2.97 billion each,
more than all but 35 Russians, Moscow-based CEO magazine
estimated last month. That’s up from $1.75 billion each in 2011.

The controlling stake in Mostotrest that the Rotenbergs
held via their 68.5 percent interest in Cyprus-based Marc O’Polo
Investments Ltd. declined to 38.6 percent after the IPO,
according to the company.

Mostotrest “somewhat disappoints investors with its annual
performance forecasts,” said Elena Sakhnova of Moscow-based VTB
Capital. Even so, Sakhnova is one of 12 analysts with a “buy”
rating on the company’s stock, according to data compiled by
Bloomberg. “Mostotrest gets very good contracts, not without
Rotenberg’s help,” she said.

Shares Rise

Mostotrest shares closed up 0.1 percent at 136.83 rubles in
Moscow, after gaining as much as 1.9 percent on the benchmark
ruble-denominated Micex Index.

The largest single Olympic contract for the $8.3 billion
rail-highway link went to state-run Russian Railways, which then
hired Mostotrest and a company now part-owned by Putin ally
Timchenko, SK MOST, among other contractors. Russian Railways’
pension fund owns 25 percent of Mostotrest.

Putin, 60, has fought to host global events to raise
Russia’s international profile and boost growth through state
and privately funded infrastructure projects, including last
year’s Asia-Pacific Economic Cooperation summit in Vladivostok.

The Audit Chamber, Russia’s budget watchdog, last November
said it found that about $490 million of the $20 billion Russia
allocated for the APEC summit was “improperly spent.” About
$506 million has been misspent in Sochi thus far, the watchdog
said this month, declining to be more specific.

‘Rough Estimate’

Russia in September doubled its forecast for spending on
the 2018 soccer World Cup to almost $20 billion, a figure Sports
Minister Vitaly Mutko called a “rough estimate,” according to
state news service RIA Novosti. Brazil’s Sports Ministry last
year said it planned to spend 30 billion reais ($15.1 billion)
on projects linked to its staging of the 2014 World Cup.

Putin, who has repeatedly vowed to crack down on
corruption, last month fired the vice president of the Russian
Olympic Committee, Akhmed Bilalov, saying his brother’s company,
which had the contract for the ski-jumping complex, was over
budget by a factor of seven and behind schedule.

“The main issue is to be sure nobody steals anything,”
Putin said Feb. 6 before the announcement of Bilalov’s
dismissal.

Three days earlier, Rotenberg’s Mostotrest said it would
seek to sell its Engtransstroy unit, which has at least four
unfinished Olympics contracts, including the Formula One track.

Road Contracts

Bilalov, who has since left Russia, started having trouble
in 2011, when organizers told him to spend what would amount to
$200 million on roads and other works that weren’t in the
contract once held by his family’s company, according to his
representative in Moscow. Bilalov denies costs jumped sevenfold,
saying they only increased 60 percent, according to the
representative, who asked not to be identified because of the
sensitivity of the matter.

Police have announced one major case of financial fraud
related to the Olympics. That was last August, when the Interior
Ministry put out a brief statement saying investigators had
foiled a plot to embezzle 8 billion rubles. No details were
provided. The ministry and the Prosecutor General’s Office in
Moscow didn’t respond to requests for comment on corruption in
Sochi.

“The cost overruns are due to corruption, the clan system
and a lack of competition,” said Sochi native Boris Nemtsov, a
deputy prime minister under Yeltsin and a political opposition
leader who tracks government spending. “All the main
contractors in the Olympics are people close to Putin.”

Cost Overruns

Sochi Mayor Anatoly Pakhomov, who defeated Nemtsov in his
2009 election with 77 percent of the vote versus 14 percent,
said spending concerns are unfounded because any “wrongdoing”
is quickly discovered and halted by authorities.

“Some people have latched onto the rising costs, but that
can happen because of unforeseen circumstances,” Pakhomov said
in an interview in his office March 6. “There won’t be any
witch hunts after the Olympics.”

Money wasn’t an issue later that night at the Blue Sea, a
trendy Sochi eatery where vintage Louis Roederer Cristal Rose
champagne goes for $1,600 a bottle and a basic crab dish can set
you back $300. The seafront restaurant was packed with well-coiffed women laden with furs and gems, a reflection of the
extravagance transforming this former Soviet city of 343,000.
Outside, trucks full of materials continued to inch toward their
Olympic destinations, spreading clouds of dust.

For Gurban Babayev, though, there’s nothing to celebrate.
Babayev, who operates a small fleet of motorized cranes, says
he’s been chasing Olympics subcontractors for $65,000 in unpaid
bills for more than a year, including $6,500 from a unit of
Rotenberg’s Mostotrest.

Even with a court ruling, seen by Bloomberg, ordering one
of the subcontractors to pay up, Babayev said he still can’t
find anyone in authority to help him collect.

“You can’t go against a presidential project,” Babayev
said. “This is so bitter for my soul. I earned this money with
my blood.”